Hospital Consolidation Gets a New Playbook

This article appears in the January/February 2013 issue of HealthLeaders magazine.

One long-held belief is that it's easier to find the truth of any story by following the money. That axiom might be the most appropriate for determining the winners and losers in healthcare reform writ large. While some leaders practice watchful waiting, many others are taking big risks by affiliating, partnering, and acquiring outside their own organization's areas of expertise. They argue that such a dramatic change in reimbursement patterns and accountability demand big strategic changes in their organizations. The future, they argue, belongs to those who seek to build their capabilities far beyond the hospital and beyond even outpatient services. They seek to be the healthcare destination for their patients—envisioning a future dominated by cooperation among healthcare services, payment for those services, and reducing waste.

Yes, traditional consolidation defined as hospitals acquiring hospitals is still viable and, indeed, pressure to consolidate is unrelenting. But some organizations are going outside of that narrow hospital-focused model to develop expertise and capabilities that go far beyond providing healthcare services to patients for a fee. Instead, they're building networks that can handle—to varying degrees—payment, patient management, and services. Payers and providers are recognizing that hospitals are being asked to do things payers have done for years: handling actuarial work, building networks, monitoring quality, and managing utilization and claims.

Of course, that logic has failed before, as hundreds of health systems started health plans in the early 1990s. Later, many of them proved financially unviable. In a similar way, today's innovative partnerships and acquisitions might be tomorrow's folly.

While many larger systems are acquiring other hospitals and smaller systems, which could be an attractive strategy, that's a business most executives know. What's really risky, and what might bring associated reward, are nontraditional alignments that combine all of what healthcare providers are being asked to do by employers, the government, and commercial payers.

Dealing with declining reimbursements
Such groundbreaking structures have worked before. In putting together two disparate parts of the healthcare system, Stephen Rosenthal had a head start. He is president and chief operating officer for CMO—The Care Management Company LLC, a wholly owned subsidiary of Montefiore Medical Center, a four-hospital system based in the Bronx, N.Y. The CMO idea was strategically ahead of its time in that its developers were seeking a way to be accountable to results of care and, ultimately, a way to deal with declining reimbursements from both government and managed care sources by delivering proof of efficacy. That foresight is paying off in other areas now, and others are emulating Montefiore's organizational structure. That wasn't the case at the beginning. Rosenthal says the creation of CMO in the late '90s was simply a response to the rise of managed care, specifically the practice of cutting reimbursement rates as a blunt way to control costs. Montefiore executives thought they could do better if it were allowed to take on some risk. "Given the market constraints at the time, the payers—both government and private insurance—were so dramatically cutting rates that on a transaction basis it would be difficult to go forward and survive," he says. "If they gave us full responsibility for the patient, we theorized, overall we would save money in the system and could use the dollars saved to sustain the infrastructure."

Bringing that idea to fruition was hard to do at the beginning, he says, but it's gotten easier because technology, which plays a major role in monitoring patients, is better and more user friendly. And, he adds, "It's an easier sell now because technology is in the national consciousness."